Bank of England's Cunliffe says can keep rates low for longer

Published Tue, Oct 28, 2014 · 10:32 PM

[LONDON] The Bank of England can afford to keep interest rates at their current record low for longer than thought, due to weak pay, low inflation and a darker international outlook, Deputy Governor Jon Cunliffe said on Tuesday.

Cunliffe's comments are similar to those from chief economist Andy Haldane and fellow deputy governor Minouche Shafik - and suggest that two other policymakers who have backed a rate rise recently are unlikely to find further support soon.

Cunliffe said that there were signs that Britain's economy was slowing after a year of rapid catch-up growth, and that the continued weakness of pay and productivity was striking. "The softening in the pay and inflation data, together with the weaker external environment, for me implies that we can afford to maintain the current degree of monetary stimulus for a longer period than previously thought," he said.

Sterling fell slightly against the dollar and euro after the remarks in a speech to students at the University of Cambridge, which reinforced the market's view that the BoE is unlikely to raise rates before the middle of next year. "The likelihood of a near-term interest rate hike from the Bank of England is rapidly receding, and this is a message that a number of Monetary Policy Committee (members) currently seem keen to get across," said Howard Archer, UK economist at IHS Global Insight.

Consumer price inflation fell to a five-year low of 1.2 per cent in September, yet official data show wages rising even more slowly - something Cunliffe said was a surprise, given the very rapid fall in unemployment over the past year.

The two members of the BoE's Monetary Policy Committee who want to raise rates from their record-low 0.5 per cent, Martin Weale and Ian McCafferty, have said bigger wage rises could be in the pipeline, and Cunliffe said this might be the case.

But there was also the possibility that a lasting increase in Britain's workforce was underway - driven by a higher retirement age for women and tighter rules on disability benefits - which could put downward pressure on wages.

There were also greater-than-usual dangers to raising interest rates too early, as the global economy was slowing and near-zero rates left little scope for looser policy if a rate rise proved a mistake, Cunliffe added. "The risk of a surprising pick-up in inflationary pressure may be more manageable than the risk of the expansion stalling and inflation dropping further," he said.


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